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Is Mainfreight Limited's (NZSE:MFT) Recent Stock Performance Tethered To Its Strong Fundamentals?

Mainfreight's (NZSE:MFT) stock is up by a considerable 17% over the past month. Since the market usually pay for a company’s long-term fundamentals, we decided to study the company’s key performance indicators to see if they could be influencing the market. In this article, we decided to focus on Mainfreight's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Mainfreight

How To Calculate Return On Equity?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Mainfreight is:

19% = NZ$334m ÷ NZ$1.8b (Based on the trailing twelve months to September 2023).

The 'return' is the income the business earned over the last year. So, this means that for every NZ$1 of its shareholder's investments, the company generates a profit of NZ$0.19.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Mainfreight's Earnings Growth And 19% ROE

To start with, Mainfreight's ROE looks acceptable. And on comparing with the industry, we found that the the average industry ROE is similar at 16%. Consequently, this likely laid the ground for the impressive net income growth of 28% seen over the past five years by Mainfreight. We reckon that there could also be other factors at play here. For instance, the company has a low payout ratio or is being managed efficiently.

Next, on comparing Mainfreight's net income growth with the industry, we found that the company's reported growth is similar to the industry average growth rate of 28% over the last few years.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Mainfreight's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Mainfreight Making Efficient Use Of Its Profits?

The three-year median payout ratio for Mainfreight is 40%, which is moderately low. The company is retaining the remaining 60%. This suggests that its dividend is well covered, and given the high growth we discussed above, it looks like Mainfreight is reinvesting its earnings efficiently.

Additionally, Mainfreight has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Our latest analyst data shows that the future payout ratio of the company is expected to rise to 52% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Conclusion

In total, we are pretty happy with Mainfreight's performance. Particularly, we like that the company is reinvesting heavily into its business, and at a high rate of return. Unsurprisingly, this has led to an impressive earnings growth. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.